Mr. Sanjay Sinha is the Head of Equity at SBI Funds Management Private Limited. He has done B.A. (Honors) in Economics from University of Delhi and is a Post Graduate from IIM-Kolkatta. Before joining SBI Mutual Fund in November 2005, Mr. Sinha was associated with UTI Mutual Fund as a Senior Fund Manager for over 16 years.
In an exclusive interview with Personalfn, Mr. Sinha gave his view on the markets, economy and explained the investment philosophy followed at SBI Mutual Fund.
Pfn: What is your view on the markets, from a short-term (1-Yr) and long-term perspective (5-Yr)?
Mr. Sinha: If you look at India as a part of a group of emerging capital markets, I think we stand out very prominently among the entire group for 3 reasons; Firstly, in terms of growth in sales and earnings, India is significantly better than the average for the emerging markets as whole. Secondly, the growth and earning is sustained on domestic consumption and that is where GDP and corporate profit growth are mirroring each other. Lastly, the quality of earning that you see here, in terms of transparency and corporate governance, is superior. Given these 3 facts, I think over the short-term and the long-term, India as a market stands out prominently in isolation and within emerging markets.
There are a number of events, which are going to impact global GDP growth such as rising interest and energy costs for almost all economies and declining pace of GDP growth in some economies which form the largest chunk of global GDP. In my opinion India will remain relatively insulated from these factors. We may have intermittent periods of volatility based on apprehension or probably based on some other issue, but I don’t think that we will be affected by the global outlook on equities.
Pfn: How do you see the Indian economy unfolding? Any significant positives or negatives?
Mr. Sinha: In terms of the ability of certain factors to impact the economy, I think if the crude prices go up beyond a point; they will begin to hurt. As of now they are pinching. Secondly, rising interest rates is also something that we can absorb. But if for some reason, which is not foreseeable now, interest rates rise significantly, by about say 300 basis points and continue to head north, then it will begin to hurt consumption as well as production. One fact we cannot deny is that, much of the growth that you see in consumption is now leveraged. Even after the rise, there is fair amount of acceptance for the prevailing rate of interest.
Thirdly on the production side, the industrial sector as a whole is now reaching almost full capacity utilisation level. Thus there is a case for capacity expansion. One way to fund this expansion will be internal accruals. However, this will not be sufficient, and if capital becomes relatively more expensive, then on the margin, capacity expansion will also get impacted. So the bullish outlook on the Indian economy and corporate profitability that is attributed to the fact that you may have a sharp growth in output and profit but not so much expansion in margin contributing to growth and profit, could be affected. These are some of the risks I can see.
Pfn: Could you explain the investment philosophy and style that is followed at SBI Mutual Fund?
Mr. Sinha: Our investment philosophy is to give the investors capital appreciation through superior stock selection and active management. Superior stock selection means that, we pursue a bottom up investment strategy across most of our funds. When I say active management, I mean the extension of the same philosophy in the sense that even though the performance of all the funds are benchmarked to a particular index, we do not benchmark the sectoral weights of our funds to the sectoral weight of the index, nor do we benchmark the portfolio component weight to the benchmark weight of the underlying portfolio.
Pfn: We have noticed that some of your NFOs in 2005 were similar to your existing funds. For example, Magnum Global and Magnum Midcap, Magnum Multiplier Plus and Magnum Multicap.
Mr. Sinha: While on the face of it they may look similar, but we have very carefully positioned them to be different from existing funds. For example the Magnum Midcap is a concentrated midcap fund whereas Magnum Global is a diversified midcap fund. This is difference number one.
Secondly, in the case of Magnum Midcap, the upper cap for investment is at Rs 2,000 crores (Rs 20 bn), where as in the case of Magnum Global the upper cap for investment has been taken as a market cap lower than the last stock in Nifty. So if you see many of these conventional midcaps have actually crossed Rs 20 bn market cap and they now have a market cap of Rs 30-40 bn. If you ask someone if some of these stocks are midcap or large cap, the spontaneous reply will be midcap, while actually it may now have a market cap of more than Rs 20 bn but less than Rs 40 bn.
The third difference is that there is this school of thought, which believes that a concentrated fund can deliver superior performance and then there is another school of thought, which believes that diversified funds do better. We want to leave the option open to the investor, and if you ask specifically, I don’t think concentration or diversification in the portfolio makes so much of difference to the return at the end of the day. Ultimately stock selection actually decides the performance.
Hence, we have left the choice to investor, as some people prefer concentrated portfolio funds. So in the midcap space we have these two funds. The same logic extends to multi-caps – Magnum Multiplier is a concentrated multi-cap/flexi-cap fund. The top few holdings have a weight of 7%-8% or so, whereas the top holding in Magnum Multicap has a weight of 4.50%. Likewise, we have Magnum Equity Fund (which has a concentrated portfolio) and SBI Bluechip (more diversified). SBI Bluechip has about 50 stocks in its portfolio while Magnum Equity Fund has only about 30 stocks. So this is the difference and even though they are in the same space they have different strategies.
Pfn: Over 5 years, how do you expect mid caps to perform vis-à-vis large caps?
Mr. Sinha: If you go by historical performance, since 2003, mid caps have been outperforming large caps. Therefore, as long as there is strong momentum of growth in the economy (and we have corporate performance being significantly good), in my view there will be lot of room for midcaps to shine.
Secondly, the universe of midcaps is much bigger (compared to large caps) at about 2,400 stocks that are traded today. The top 150 stocks will have a market cap of more than Rs 40 bn approximately. So the universe to select mid cap stocks will be much bigger.
Pfn: SBI Mutual Fund has witnessed a churn in the fund management team with the exit of Sandeep Sabharwal, how has this impacted the performance of your schemes?
Mr. Sinha: There was an impression that after his departure from the earlier team, the performance of the funds would slip. But you will at least appreciate the fact that the performance of the funds have been maintained and in many cases improved.
Fund performance has two components; there would be a certain basic performance that the fund houses will be able to deliver based on the process, and then the individual gives this extra amount of spark. I acknowledge that the individual also brings that extra performance to a fund. What I have tried to put into place has already been implemented, to ensure that the basic performance of the fund can be delivered. We have a clearly demarcated research team, a fund management team and an execution team.
The research has been strengthened. We now cover close to 230 stocks across existing portfolios with the help of four dedicated research analysts and three members who are analyst-cum-fund managers. How are we able to do that? We have divided the entire coverage of stocks into Level A, Level B and Level C. Level A of coverage would be a fairly intensive level of coverage where the analyst is expected to be in sync with whatever is happening in the sector that he is covering and how it will impact the company within the sector. He should have his own forecasting model for companies in Level A of coverage. In Level B, he could take the help of research analyst outside the organisation to keep a track of the company. In Level C of coverage we update our view on the company’s performance on a quarterly basis and see that the expectations and performance are actually in tandem.
Now, a top holding of the fund house does not necessarily have to be a Level A coverage. Level A of coverage would be something where either as a fund house we own a significantly high percentage of the share capital or we have a very high exposure to a stock, which is not so well-researched by the industry, but we have a high exposure in a fund.
So, it’s a practical approach that we have taken to distribute the entire 230 stocks that we have in our coverage, across the research resources that we have at our command.
Pfn: In your view how much of a diversified equity fund’s portfolio should be invested in the top 10 stocks?
Mr. Sinha: The answer to that would depend on the style that the fund manager is comfortable with. Some fund managers who would be comfortable with a very concentrated portfolio and can hold as much as 55%-65% of the holdings in top 10 stocks. Then there are fund managers who are more comfortable with more diversified holdings – their portfolios can be so diversified that the top 10 stocks account for only 25% of the holdings. I believe, the ideal holding should be somewhere in between, say around 40% exposure to top 10 holdings. But it can swing in the range of 25% to 65% depending on the fund manager’s comfort.
Pfn: One school of thought believes that the investor gives money to a fund manager to invest in stocks and not for holding cash. Others believe that market conditions should determine the allocation to stocks and cash. What is your view on the same?
Mr. Sinha: My view is that the mandate when you are investing money in an equity fund is to be fully invested in equities. You should move between sectors or between stocks to be able to generate that superior return. I don’t deny the fact that there is this expectation that a fund manager should be moving between asset classes to generate superior returns. But that is something, which is not the mandate of an equity fund. This should be the strategy for an asset allocation fund where you are mandated to move between asset classes.
Pfn: What is your view on thematic/sector funds, given that they tend to perform only over short time spells and trail diversified equity funds over the long-term?
Mr. Sinha: Sector funds will always be popular during a phase or will be popular in a niche segment. They are not for an average investor who does not have a fairly good understanding of the dynamics of the sector. But the reality is that you will find investors flocking to a sector fund during a euphoric phase and moving away later on, probably lamenting the decision on hindsight. But strictly speaking, sector funds have an appeal during a timeframe when a sector is doing well. Secondly, it is relevant for someone who understands the sector well and wants to time that sector. And thirdly, diversified funds will always be able to generate superior performance vis-à-vis sector funds over a long period of time.
Pfn: What kind of books do you like to read?
Mr. Sinha: I read wide variety of them. I enjoy reading biographies and autobiographies. I also enjoy fictions given whatever time I have at my disposal. I also read books on subjects related to the industry and also writings of Benjamin Graham and Warren Buffet. But two books on finance and investment related matters that I really enjoyed reading are ‘Reminiscence of a Stock Operator’ by Edwin Lefevre and ‘Market Wizards’ by Jack Schwager.
Pfn: Where do you invest your money?
Mr. Sinha: I mostly invest in mutual funds.
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